"Price is what you pay. Value is what you get."

In this quote, Warren Buffet eloquently states exactly what it means to be a value investor.

When you buy a stock, you are buying ownership of a business with real assets, both tangible and intangible. These don't change just because the market is moody, or the Fed deciding not cut rates by an additional 25 basis points. As long as the fundamentals of your business are strong, the daily price changes in the markets do not alter the value of what you own.

Which makes this so hard to do is that the pace of business remains much slower than the pace of the stock market. You get new information about a stock price every minute, but accurate information of a business's performance comes every quarter. This huge discrepancy causes most investors to overvalue the wrong things in the market. The good news is that it will provide you opportunities to profit if you know where to look.

If you want to sell your house, and someone low balls an offer, you will reject it because it isn't worth the value of your assets. You would wait until the right fair offer comes along so you get the fair price. If the neighborhood starts to deteriorate, your house would be lower in value even if someone offers a higher price, so you should sell. Stock picking should be no different.

The truth is that most stock movements don't reflect the changes in the discounted future cash flows a business bring in, but for a number of irrelevant reasons like sentiment. Occasionally price drops could signal deteriorating fundamentals which have to be watched out for, but more often than not, it is just noise.

Thinking about your stocks as ownership of business is essential for getting through volatile changes. Remember that price movements mostly are the results of irrational behavior, and you should be valuating a business by the quality of its fundamentals. It might be painful to see the price decline in the short run, but if your analysis is correct, the market will reward you given enough time.

The first rule of investing

“The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1.” - Warren Buffet

When I first read this quote, I thought that Warren Buffet was crazy. Conventional wisdom tells says that the only way to get big returns like is to take big risks. I am determined to make the biggest gains possible, and Buffet is encouraging me to take the boring conservative route. Nope, I am in it to make it big

However this recent bear market woke me up and I now understand the full value of Buffet's words.

The first thing an investor must master is the art of not losing money. Most investors have this concept backwards, and only focus on the possible gains you can make Learning not to lose money sounds boring, and we want to make the big bucks when investing, but this is THE fundamental skill that you must have.

Now here is the secret: Once you are able to accurately look for opportunities that won't lose you money, you can find that stocks where the risk/reward ratio that are mispriced by the market. There are opportunities out there where you can get reap big rewards, while taking little risks if you follow Buffet's #1 rule. This is how he and many other great investors made their billions.

Conventional wisdom is just dangerous in this case. Its belief that stocks are accurately priced justifies the need to take excess risks to make excess returns. In reality taking large risks, will more than likely lose you money in the end. Just remember that if you make a 50% loss, you have to make a 100% gain to make it up, and you will see why.

While the main focus of my blog is on value investing, I believe this rule is important to all forms of trading. I bet if you stop worrying about chasing gains, and focus more on not losing money, you will be a more successful investor/trader.

So who has the cajones to short oil?

Watching CNBC and Bloomberg TV, most traders and money managers think that oil prices are fueled by speculation and not fundamentals, but they are all afraid to short it.

I am watching the CNBC oil crisis special right now, and it is just ridiculous. When the feeling that oil will remain high forever, and that we have to learn to adjust to it sets off red flags, when everyone says that it isn't reflected into fundamentals.

Bubbles are Ponzi schemes and are unsustainable in the long run, so its inevitable that it will come down. The crazy thing is that no one is expecting it to come down because they expect it to rise up more in the short run. They are afraid to fight the trend, and they are probably justified in that to some extent.

The problem is that everyone is expecting it to go up. When everyone expects something will go up and inevitable, its probably means the end is near, but who knows? I am not an expert on this, and this could create a self fulfilling prophecy.

Whatever, talk is cheap so. The problem is that TD Ameritrade won't let me open a margin account (That's what you get for being unemployed with an ugly looking portfolio), so I can't short and I don't know how to get into commodities without ETFs (which are the reason we are in this mess). So I have to resort to shorting with my valuable reputation.

I am calling the oil top right about NOW: meaningless non-ballsy paper shorting oil at 130.69 with a completely useless stop at 134.

It's OFFICIAL: Oil is in a bubble

When airlines are forced to cut routes and oil rises $4 to a record high, the fundamentals aren't following reality.

These oil prices are just becoming insane and the only thing you hear about is oil going higher, I am calling bubble.

UPDATE @ 5:15pm: Oil is at 134 now, so WTF

The market panicked over nothing

So I went to walk my dog today, came back and found that the Nasdaq fell 37 points. I wanted to find out immediately why, so I checked Bloomberg.

Are you serious? People are selling because the Fed says it won't lower rates anymore. Isn't 2% low enough?

What I don't understand is what people are think that a lower rate is going to accomplish for the stocks they are investing in. Your company couldn't get a loan out at 2%, but it could when rates are 1.75% are 1.5%? I understand that Fed target rates have an effect on the economy, but when they are getting this low, I don't see how they are going to make a difference.

Not to mention the biggest problem with our economy right now, inflation. Consumer's are cutting back spending because $4 a gallon gas and high food prices. A weak dollar isn't going to help that at all.

I'm am sticking to my theory that Wall Street is full of a bunch of idiots, who believe that Fed cuts are the magical panacea to the market's problems. They only sold because conventional wisdom tells them that no Fed cuts are bad for the market, that's it.

Efficient use of the Efficient Market Hypothesis

If I believed in the Efficient Market Hypothesis, I wouldn't be trying to beat the market, yet I still use the EMH all the time in the markets.

Using the EMH is a great way to filter out information. When I don't understand how something works in the market, I just assume its efficient. Efficient markets are average returns so you might as well just buy the S&P 500 index instead. What I want to focus all my energy on is the inefficiencies, where I can make excess returns.

One sector of stocks I use the EMH is the financials. CNBC talks about this sector daily and there is probably some value in there somewhere with the crazy volatility. I just don't know where to find it or what actually goes behind the scenes at the organizations. They are too complex for me to understand especially with all the complex derivatives involved, so I just assume they are efficient.

While everyone was playing the game whether their financial stock was a value or a value trap, I just used the EMH and looked for easier plays. CNBC's constant coverage makes it seem like you have to play this sector, but it was really just a fools game as far as I know.

I would like to modify the EMH, to change it from there is no way to beat the market, to there is no EASY way to beat the market. If you want excess returns, you have to devote time and energy. If you aren't willing to put the effort, then you should follow the EMH, and buy a diversified portfolio of stocks and bonds.

Although I believe that the markets are inefficient more times than not, the EMH has practical uses for investors. You have to be gifted just to find a few inefficiencies, but it is impossible for a mortal to find them all.

Why I don't use stops

Stop losses are essential for managing risk if you are a momentum or technical trader, but they do the complete opposite for value investing.

Fist, the concept of stops goes directly against what value investing. Keeping the fundamentals constant, a lower price means less risks in the market. Your stock is even further below the intrinsic value, so if anything you should be buying more.

Using stops will more than likely guarantee losses than limit them. The problem is that stocks are just volatile, and more than likely, your stop will be triggered at one point, usually at exactly the wrong time. You can try to get around this by setting a stop even lower level, but you just risks selling your stock at a lower price when there is even less risks.

Now, if the stock drops because of a change in long term fundamentals, then you should get out. If you realized that you are now holding a broken company, you are no longer investing based on value, but on hope.

The hardest part about value investing is discerning whether a drop of price is justified by the fundamentals or irrational market fear. The problem is that we are human, and these price declines affect our emotions and our judgment of the situation. When the market is giving you the sick feeling in your stomach, the only immediate remedy to stop the pain is to sell, which usually at the worst time possible.

One method that I like the best to fight this urge is to write down your justifications for your stock in advance. Stepping away from the stock price, and rereading why you bought the stock in the first place will help you find your bearings again. If your story for buying the stock remains the same, you can justify holding onto it. Putting down the risks and fundamental events that will justify you to sell your holdings will keep you more objective, so that you will know if it is alright to sell.

This is still easier said than done. As much as people try to fight it, we will always be affected by the herd psychology. However, preparing in advance for these situations in advance will still make it much easier to handle these tough times.

One last thing I wan to stress is that value investing is completely different than other types of trading. In value investing, you don't play the psychology of the market, so there is no need to protect yourself from it with stops. You have to have a different set of tools if you want to successfully make excess returns in the market.

Short squeeze?

I am basing my LDK trade off long term fundamentals, but I realize that 99% of the price action is technical with little barring on the company so here are my thoughts on the situation.

I don't trade on technical information, so I don't have any proof of my ability to read the tape. As far as I know, I could be talking out my ass. Anyways, here is my analysis of the based of my intuition or feel for the markets.

One thing that has been a major theme of LDK is that it has high short interest. For the most point, you would have made money in the stock going short in LDK. One pattern I noticed a lot was that LDK would show some sign of strength in the morning, while doing a slow decline on low value throughout the day. After each sign of strength on news, LDK eventually gave it all away in the following days.

Being long through this period was just painful. There were days that I knew that my holding in LDK were going down, either from heavy shorting or panic selling. I saw it happen over and over, using it to my advantage to average down, buying more shares at the lower price because I stubbornly knew LDK was way undervalued. Still this pattern went on for months and months, and it looked like it would have never turned around. I assumed that either I was insane, or the market was.

About two weeks ago, I noticed that the technical situation has been doing the opposite. Instead of a slow sell off throughout the day on low volume as expected, there were huge spikes up in price and volatility. I assuming that these were short squeezes, because they always occurred at a breakout, and LDK just has ridiculously high short interest.

Even after the recent sell off after earnings (which were great IMHO), the price quickly found support and started to rise again. Before these sell offs would have just created a massive panic, and the price would plummet 10% or more for the day with an additional 20% the following week. Something is different about the this stock, like there is actually real strength supporting it.

For the first time, I am not only confident in the fundamentals, but also the technical strength of the stock. Shorting this stock is not profitable anymore, and I think traders will eventually get the idea or risks getting stuck in a massive short squeeze. It is only a matter time before this baby takes off.

The quest for a wind play

I got excited when Jim Cramer found a pure wind play Broadwind Energy (BWEN.OB), but then I started to look at the fundamentals.

With the recent Cramer bump, this company has a market cap of $1.3 billion with revenues of only $30 million in 2007. While this is a fast growing industry and revenue can increase, there isn't any room for a margin a safety and this stock is a huge gamble.

To find more about the company, I started reading its 10k forms and see what the company is about. One thing that I noticed is that the management hasn't been using US GAAP for its financial records, and has hard time organizing its financial statements with all of its recent acquisitions.

I will give the management the benefit of the doubt here because this is a young growing company, and they didn't really have the need to use GAAP in its records. The management is aware of this problem and will probably eventually get it straight. Regardless, it shows that the management doesn't have a firm grasps on all aspects if the company, and there is a lack of transparency.

Fellow Covestor member yaktipper mentioned the wind company A-Power Energy Generation Systems, Ltd. (APWR), which happened to be the only company that doesn't have a website. I tried looking at the SEC filings to find more about it, but I still don't know exactly what this company does. It is also based in China, and I am looking for a US wind play on the basis that the US has lots of capacity for wind energy. I don't know how economical it is to transport wind towers overseas vs building them here.

So I am still looking for a solid pure wind play. BWEN and APWR have potential, but there is too much risks for the price for my taste. There aren't any companies that have strong fundamentals at a reasonable price other than big conglomerates.

Even though I think wind is the best source of alternative energy, I won't invest in it if I don't see the right opportunity. It's unfortunate, but hopefully I will find a good play if I am patient.

Analysts are idiots

The problem with analysts is that they are just too anal. They focus too much on the numbers and ratios, and forget about the big picture.

Listening to the NVIDIA conference call is ridiculous. The thing that concerned them the most was missing it's gross margins by 110 basis points, bringing it down to 44.9%. So what?

What I care about is how NVIDIA will continue its competitive edge in the industry. I can sacrifice a few pennies per share here and there on things called R&D if it will increase its market power and future earnings.

I loved NVIDIA's CEO, Jen Hsun, comment saying that he would hire 100% more people tomorrow if he could find the talent. He understands what driving his company's success, while the analysts are worried about counting the beans.

NVIDIA is the great company it is today, because it can produce better GPUs than all its competition. It is the undisputed leader, and needs to focus every effort it has in maintaining its position. It has done this by having the most experienced engineers in graphical computing, not by cutting costs.

If you don't have the technology leadership in this business, financial ratios don't matter. Cutting costs are vital, but you shouldn't sacrifice your long term competitive edge for a short term gain.

I don't care too much about Q2 performance like all the short sighted analysts. What is more important is NVIDIA's numbers in 2009, 2010 and beyond. In a rational world, stocks are worth the value of discounted cash flows, not whether they miss a single quarter by a penny.

The only good thing about analysts is that they help make the markets inefficient giving you opportunities for profit. You can't make money if everyone agrees with you.

I was hoping that NVIDIA would rise on higher expectations, but I guess I have to wait for the company to deliver proof in the future.

Patience... Goddammit

I hope your stocks to go down

I hate it when the markets are up because the only thing I see is missed opportunities. The only stocks that I care about going up are the ones I own.

As a value investor, I want every stock to get as cheap as possible until I buy it. The lower a stock price is, the less risks and greater margin of safety there is in buying it. The higher stock prices go, the more risks there is in the market.

Now, I want the fundamentals to remain strong, because if they go down with the price, you aren't gaining any opportunities from it. The great thing about bear markets is that most investors can't distinguish between the actual business and the stock price. They assume bad prices means a bad company, which presents some nice deals.

The problem with bull markets is that investors can't distinguish between stock prices and the performance of the business itself. This means stocks end up going up for the wrong reasons trading at absurd valuations. Good for the momentum player, but bad for the value investor.

Now I rarely get my way because most stocks end up correlating with the markets, but when my stocks go up I want everything else to crash.

The Microsoft and Yahoo deal is still on

Microsoft offered $33, while Yahoo wouldn't accept anything less than $37. Microsoft backs down and analysts are acting like this deal is over and are now speculating what these companies will do next. However, I think these analysts are completely missing the point.

I bet Steve Ballmer is saying, "if you really think your company is worth $37 a share, prove it." Yahoo's shares will fall, shareholders will feel the pain, and will eventually give in to Microsoft's demands. They are placing the ball in Yahoo's court for now.

Microsoft's offer is already high at $47 billion, and I don't think they can justify anything more to their shareholders. Yahoo wants an additional $6 million, which is still a big deal even for Microsoft's standards. The good thing is that Yahoo is actually naming a price which is in the same ballpark what Microsoft is offering. This signals that they are open to negotiation.

Microsoft could probably do a hostile takeover, but it could make synergies between the two companies harder afterwards, negating many of the benefits from the deal. A smarter strategy would be to walk away for now, and see if it gives you leverage in the deal.

I have two theories why Yahoo's CEO Jerry Yang is not accepting Microsoft's bid. Either he doesn't want to sell the company he spent his life running over to the dark side, he is just trying to milk Microsoft out a few extra Billion, or a combination of the two. Either way, he will be forced to give in to the pressures of Microsoft and his shareholders.

If Yahoo starts trading in the low twenties because of this news, it could provide a good arbitrage opportunity to take advantage. There is a high probably chance that Yahoo and Microsoft will eventually come to a deal.

I don't know if I will take advantage of it personally, just because I have no free cash and my investments are in other great opportunities for large gains. Although I might not be putting my money where my mouth is, I would if I could, if that means anything.

Looking for some wind plays

I honestly think that wind energy is a better alternative energy source than solar, although my investments seeks otherwise.

Wind is more scalable and cheaper, with the main objections being NIMBY (not in my back yard). I really think people will get over the aesthetic looks because they really aren't ugly when it comes down to it. They are much more attractive than other man made creations like power lines which we all seemed to get used to. It is just a matter of time before opinion changes on this.

The problem is that I have a hard time finding good wind plays in the market. All the wind turbine producers either trade abroad are apart of large conglomerates like GE and Siemens. Nothing against GE, but I don't won't to worry about the risks of a writers strike when I am doing a wind play.

Most other wind stocks I fine aren't profitable and usually trading on the OTCBB or Pink Sheets. As a rule of thumb, I only invest in companies on the NASDAQ and NYSE, because I assume that there is a reason that these companies aren't listed there.

I only invest in companies that can bring in profits, or at least considerable revenue which they can reasonably turn into profits. There is so much crap in the alternative energy sector that you have to have proof they can deliver returns before jumping in.

Jim Cramer recently highlighted some companies that could have potential. Trinity (TRN) and Otter Tail Corporation (OTTR) look like they have potential. Both companies are small caps and are diversified in other areas, which offers some protection against downside risk, but can still have significant exposure in the industry. I always take Cramer's recommendations with a grain of salt, but I am going to start researching those companies and see if there are any opportunities.

I am holding to my LDK solar stock because it is way undervalued and solar is still a good play. If LDK solar price goes up however, I will take some gains and try to find other opportunities with that money.